The specific goals of the proposed research are to: (1) examine the correlates of X-inefficiency in U.S. hospitals and (2) validate inefficiency estimates from Stochastic Frontier Analysis (SFA) X- inefficiency is the difference between optimal performance and actual performance. X-inefficiency may account for as much as 18 percent of the expenses in U.S. hospitals. Concerns about excessive expenditures have created a long standing interest in understanding the causes of inefficiency in U.S. health care organizations. Most of the studies that have attempted to examine the impact of market forces or regulations on hospital efficiency have used costs as an indirect measure of efficiency. The implicit assumption has been that if costs are decreasing, efficiency must increasing. This assumption may not be correct. In addition to increasing efficiency, costs can be contained by reducing services or changing product mix from more expensive to less expensive outputs. Thus, an examination of a direct measure of hospital efficiency is important because it reduces reliance on tenuous assumptions, thereby clarifying the impact of environmental factors on an important dimension of hospital performance. The proposed research will apply SFA to develop measures of inefficiency in U. S. hospitals. The stability and validity of the inefficiency estimates will be evaluated by bivariate analysis. The estimated inefficiency index will serve as the dependent variable in multivariate analysis of the factors associated with inefficiency. Independent variables will be used to test hypotheses about the impact of the following on hospital inefficiency: teaching mission, ownership status, regulatory pressures, competitive pressures, HMO penetration, and uncompensated care A 1997 cross-section of over 1,700 metropolitan hospitals will be analyzed. Primary data sources include HCFA, AHA, and ARF (Area Resource File).